Economist, Telegraph Columnist, Broadcaster

Project Fear Gets Carney On Side – But Is Still Wrong

“To retain credibility, it’s important central banks don’t claim to know more than they in fact do”. So said Former Bank of England Governor Baron (Mervyn) King in his recently published book, The End of Alchemy. Does King’s successor agree? In August 2013, a freshly-appointed Mark Carney, under his new “forward guidance” policy, declared the Bank would finally raise interest rates when UK unemployment, then 7.8pc, fell below 7pc.

Almost three years on, after faster than expected growth, unemployment has fallen to 5.1pc, yet the bank rate remain at 0.5pc – where its been since being slashed in the aftermath of the 2008 Lehman Brothers collapse.

While keeping rates on hold for the 86th month in a row last Thursday, the Bank of England also published its quarterly Inflation Report. No-one commented much on the 47-page technical document – except to note CPI inflation was a rather insipid 0.5pc in March. For the only message that mattered, a message that will be endlessly repeated as 23rd June approaches, was Carney’s rhetorical broadside against the UK leaving the European Union.

Several weeks ago, the Treasury rolled-out its “dodgy dossier” on the economic costs of Brexit. Since then, the Chancellor and numerous Remain supporters in government and beyond have consistently described as “fact” the damage Brexit would do to the UK economy – not least UK households being “permanently poorer” to the tune of £4,300 a year by 2030.

No matter that his number was based on barely-defensible, almost laughable assumptions. No matter the Treasury often can’t successfully estimate GDP a few months into the future, let alone a decade and a half hence.

The dubious forecasts of the Chancellor’s own department are still “fact” – and don’t you forget it. The contrived outcomes of further Treasury studies in the pre-referendum weeks to come, “proving” countless City jobs will be lost under Brexit, with wages “clearly plunging” if the British public has the audacity to vote to leave the EU – will also no doubt be presented as “fact”.

The Bank of England has tried to be a bit cannier. Carney made judicious use of not-quite determinate words such as “may”, “could” and “likely”. Yet despite this nod to independence, science, human frailty – I don’t quite know what – his presentation still fulfilled its intended political function. As the Prime Minister himself said: “The message from the Bank of England could not have been clearer”.

There are “increasing signs that uncertainty over the EU referendum has begun to weigh on activity,” says Carney. Really? The world economy as a whole is sluggish, with the latest PMI survey data pointing to annual growth of just 1.5pc – well below the long-run average of 2.3pc. Average growth across the developed nations is only slightly ahead of February’s three-year low. The US slowed to annualized growth of 0.5pc in the first quarter, with the UK managing 0.4pc. So pretty much the same.

The Inflation Report didn’t dwell on future scenarios, or formal growth estimates under Remain or Leave. It also explicitly confined its analysis to the two-to-three year horizon of monetary policy – again, in a bid to maintain the veil of independence. It was surprising then (or not) that Carney talked so confidently and in such headline-grabbing terms about a “technical recession” under Brexit – two successive quarters of GDP contraction. After all, if Leave does prevail next month, for at least two years (during the so-called Article 50 negotiating period, as we cut a new deal with the EU), existing trading arrangements would remain exactly as they are today.

Brexit is the “greatest risk to domestic financial stability”, the Bank tells us. That’s absurd. The greatest risk to domestic financial stability is, by some margin, a broader market implosion as the Western world tries desperately to retreat from too-low-for-far-too-long interest rates, while weaning investors off the financial morphine that is quantitative easing. Added to that, the UK faces the real danger of contagion from a systemic crisis in the eurozone – which could be sparked, inter alia, by an Italian banking meltdown or the bad-tempered failure of on-going bail-out negotiations in Greece.

Carney warned of “notably higher” inflation post-Brexit. I thought that’s what we wanted? Isn’t that why we printed all this virtual money, expanding the Bank of England’s balance sheet four-fold and more, because of “the threat of deflation”, because inflation is too low?

The Governor warned of a “perhaps sharp” fall in sterling if voters choose to quit the EU. This is wrong on many levels. For one thing, a weaker currency isn’t necessarily bad – seeing as it could help UK exporters make inroads into our record current account deficit. More importantly, though, a central bank governor should never, ever speculate about a sharp exchange rate movement, as it’s extremely dangerous.

Brexit could happen. This is not a joke. Carney’s words on sterling last week – even if they’re never repeated again before decision day, which they shouldn’t be – will stay in traders’ minds. Given the UK’s still huge fiscal and external deficit, the governor is in danger of provoking a deeply disruptive currency collapse if Leave does indeed prevail – as oppose to a more gentle, and potentially useful, depreciation.

“Project Fear” cranked-up last week. Cameron is predicting war – despite saying, just a few months ago, he too might vote Brexit. Various US and Nato defence bosses then wagged a collective finger of admonishment. Now the Bank of England has chipped-in, doing everything possible to push the wavering middle-third of us toward Remain, the crucial “undecided” voters who will determine this referendum.

Many moderate people, given the extent of the government’s scare tactics, are actively questioning the near-consensus backing of Remain among “most economists” and the “great and the good”. Rightly so. Those 364 economists who wrote to The Times after the 1981 budget, arguing against stiff monetarist measures finally to squeeze-out high inflation – wrong. The endless bien pensants who tolerated rampant trade union militancy, whatever the economic damage inflicted – wrong.

“Almost all mainsteam economists” insisted we join the Exchange Rate Mechanism in the early 1990s – all wrong. Those who insisted in the late-90s that Britain would “suffer” and “lose millions of jobs” outside the single currency – many of whom now predict Armageddon if we vote for Brexit – completely and utterly wrong.

I want Remain supporters to argue with passion, determination and commitment. There’s an economic case to be made – albeit one which I reject, and which is anyway blown away in my view by considerations of self-determination and democratic accountability.

What is completely unacceptable is for the government and its Remain allies to use the apparatus of the state to make spurious claims, endlessly repeatedly, in an attempt to frighten ordinary voters into acting in a certain way during a referendum campaign that should be a celebration of our democracy, not an episode during which many feel democracy is being usurped.

Despite Project Fear, despite all the coordinated effort by those in authority, it’s astonishing the polls are still roughly split – with some even showing Leave ahead.

Many modern internet polls under-sample older and rural voters – those more likely to want Brexit. A “spiral of silence” may also be under-stating support for Leave – similar to the “quiet Tory” phenomenon of the 1992 general election, when there was a reluctance to admit voting Conservative for fear of disapproval.

The economic costs of Brexit are being “exaggerated”, says Baron King. And, if the polls don’t budge, and Remain panics, they’ll be exaggerated even more.